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1.

Input of the US advisory panel on federal international tax reform. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2006.

Summary

In November 2005, the U.S. President’s Advisory Panel on Federal Tax Reform released a comprehensive Report titled “Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System.” The Report addressed all aspects of the federal income tax treatment of households and businesses under both domestic and international rules. This paper focuses on the proposals dealing with international elements of federal tax reform that affect multinational businesses. The report presents two broad Plans for improving the U.S. Internal Revenue Code in general and the international aspects of the Code in particular. The Simplified Income Tax (SIT) Plan recommends moving toward a territorial-based income tax system that would exempt active foreign-source business income of foreign branches and controlled foreign subsidiaries at the corporate level and would tax mobile foreign-source income. The Growth and Investment Tax (GIT) Plan recommends moving toward a consumption-based tax system that would tax U.S. businesses on total sales less certain inputs. To highlight the essential aspects dealing with the income tax, this paper will focus on the Simplified Income Tax Plan.

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2.

Tracking labour market reforms in the EU Member States : an overview of reforms in 2004 based on the LABREF database. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2005.

Summary

The paper examines the rationale for creating a database on labour market reforms and looks at the value-added of LABREF compared with existing datasets. In doing so, it considers recent developments in the economic literature as regards the design of labour market institutions. After a description of the coverage and structure of the database and of the information contained therein, the paper provides a summary overview of reforms enacted by EU Member States in 2004. On the base of the qualitative information in the database, the paper builds simple indicators of reform intensity and makes a tentative characterisation of the reforms strategy implemented by the Member States in 2004.

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3.

The determinants of part-time work in EU countries : empirical investigations with macro-panel data. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

Summary

This paper aims to identify the contribution of the business cycle and structural factors to the development of part-time employment in the EU-15 countries, through the exploitation of both cross-sectional and time series variations over the past two decades. This analysis is used to comment on whether part-time jobs have been used as a flexible work arrangement by firms in the EU-15 over this period. Key results include that the business cycle, as measured by either the output gap or real GDP growth, is found to exert a negative effect on part-time employment developments. This is consistent with firms utilising part-time employment as a means of adjusting their labour force to economic conditions. Correspondingly, involuntary part-time employment is found to be countercyclical, being higher in troughs of economic activity. Splitting our sample by age and gender groups reveals a very significant effect of the business cycle on the rate of part-time work for young and male prime-age workers. Conversely, the effect is very weak for women and insignificant for older workers. Institutions and other structural (sociological, demographic and economic) factors are also found to be significant and important determinants of the rate of part-time employment. Changes in legislation to part-time employment are found to be effective, having a strong and positive impact on part-time employment developments. Moreover, employment protection legislation is positively correlated with the part-time employment rate, which is consistent with the use of part-time work as a tool for enhancing flexibility in the presence of rigid labour markets. Less robust evidence suggests that the unemployment-benefit replacement rate exerts a negative impact on part-time employment – indicating the presence of unemployment traps for some potential part-time workers. Cross-country evidence also suggests that the lower labour costs borne by firms when employing part-time - compared to full-time - workers has a large and positive influence on the part-time employment rate. JEL Classification: J21, J22, J68 Keywords: part-time employment, labor supply, labor market policies, institutions, regulations, the business cycle, child benefits, unemployment benefits, trade unions, employment protection legislation, temporary jobs, female participation, schooling, wages and non wage costs, young workers, older workers, female workers, prime age workers.

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4.

An analysis of EU and US productivity developments : (a total economy and industry level perspective). European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

Summary

The present study will contribute to the ongoing debate regarding the sources of growth in general, with specific attention being devoted to productivity determinants given their importance in shaping medium to long run changes in living standards. Any analysis of growth however must be seen as an ongoing process, with economies in a constant process of “creative destruction” and with the emerging structural patterns difficult to disentangle from cyclical influences and policy adjustment lags. Consequently, while the main sources of growth over long periods of time are easily established, less success is possible in explaining more recent breaks in trends and in assessing whether these breaks are durable or not. While the evidence of a break in the US is becoming more compelling, for the EU, short-run transitional factors severely complicates an assessment at this point in time. The 1990s have witnessed some important shifts in the underlying growth performances of the EU and US economies, with a significant gap opening up in terms of GDP, and more importantly, GDP per capita, growth rates. From a situation over the period 1980-1995 when EU and US living standards were growing at roughly an equivalent rate, the second half of the 1990s has seen the emergence of a significant growth gap in favour of the US. These EU-US differences are mirrored at the EU Member State level, with simple measures of dispersion indicating that individual country divergences relative to the average EU performance have grown by close to 50 per cent in the 1990s compared with the 1980s. These extra- and intra- EU divergences in economic fortunes have been the subject of intense research efforts in recent years, with policy makers keen to decipher the reasons for their own respective outturns and to further refine the “magic formula” for boosting their long run growth performances.

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5.

To be or not to be in the euro ? : benefits and costs of monetary unification as perceived by voters in the Swedish euro referendum 2003. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

Summary

The purpose of this paper is to examine the result of the Swedish euro referendum from an optimum currency area approach. It is structured as follows. First, the election result is summarized. Then the views of the economics profession on the benefits and the costs of membership in a monetary union are briefly considered. Next, the main arguments of the Yesand No-campaigns are presented. Thereafter, the voting behaviour predicted by the political economy of exchange rate regimes is described. Against this background, data compiled by the Swedish State Television through exit poll surveys on the distribution of Yes and No votes across socio-economic groups are examined. The results from a number of referendums on EU membership are then compared with the Swedish euro referendum. The role of trust and history in determining the monetary regime is briefly considered. The Swedish referendum in September 2003 on adopting the euro or keeping the domestic currency, the krona, represents a unique event to examine the public’s perceptions of the benefits and costs of monetary unification. The voters chose between the two polar cases of exchange rate regimes: either a freely floating exchange rate or membership in a monetary union. Three major conclusions emerge from the analysis of the exit poll surveys gathered on the day of the referendum. First, the optimum currency area theory proves to be a constructive framework to predict voting behaviour across socio-economic groups and regions in Sweden, assuming voters behave in their self-interest. Second, the distribution of the expected benefits and costs across groups was a major determinant of their voting behavior. As predicted by theory, the Yes-vote was strongest among voters employed in the tradable sector, in high growth regions as well as among high-income earners and well educated. The No-vote was strongest among voters employed in the non-tradable sector, in particular in the public sector, and among low-income earners, the unemployed and the less educated – in short, among groups dependent on public-sector transfers to maintain their living standards in the event of adverse economic shocks. Third, political attitudes towards the European integration process heavily influenced the views of the voters towards the euro.

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6.

Economic governance in an enlarged euro area. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2008.

Summary

Ten years on from its launch, it is clear that EMU, which has to be regarded as a more profound regime change than is often acknowledged, has had a pronounced effect on economic governance. As a framework for the conduct of macroeconomic policy, EMU has had undoubted successes in assuring price stability and in instilling greater fiscal discipline, yet it is open to the criticism that it has not (yet?) delivered improved performance in the real economy. Moreover, some of the compromises made at the outset and over the twenty years since the roadmap for EMU was first set out, notably to reconcile divergent French and German preferences, have left certain elements of the policy architecture unresolved. In the coming years, several more Member States are expected to become full participants in EMU, so that fresh thinking on the governance arrangements is warranted, not least to accommodate the rather different economic characteristics of the candidate countries. This essay looks at the governance of EMU and how it may need to evolve as the euro area enlarges. It discusses the meaning of economic governance and puts forward a conceptual model embracing different facets of governance, highlighting the significance of policy coordination, then assesses how well EMU fares on these aspects of governance. The essay then discusses the challenges of fulfilling the convergence criteria for prospective new members of the euro area and suggests possible changes in the application of the criteria, and considers how the institutional structures for managing EMU may need to evolve. The need for greater politicisation of economic decision-making and for new approaches to policy co-ordination – especially to integrate the supply-side more effectively - is stressed as a likely way forward if EMU is deal with emerging demands on policy-making.

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7.

Economics of the Common Agricultural Policy. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

Summary

This paper analyses the economic effects of the main policy measures by using standard economic analysis and empirical evidence. Price support, production quotas, set-aside restrictions, direct payments linked to production, and an uneven support across sub-sectors all have more or less obvious impacts on allocational efficiency, on transfer efficiency, and on the overall welfare of society. Substantial support to the agricultural sector (122 bn € in 2003, which equals 1.3% of the EU’s GDP and 84% of gross value added in the sector) not only implies a tax for the rest of the economy, but also leads to significant allocational inefficiencies within the agricultural sector itself. Furthermore, farmers’ net benefit from consumers and taxpayers transfers is limited. The transfers of the main policy instruments – price support and area payments – reach farmers only to a low extent (about 25% and 50%). Price support (about 62 bn € in 2003) which still represents more than 50% of total support leads to shifts in production mix and intensities, changes the consumption behaviour and thus implies higher welfare losses than other forms of support. In addition, it runs counter to cohesion objectives as it implies ‘hidden’ cross-border transfers from consumers in the Mediterranean cohesion countries to producers in other Member States (0.8 to 1.5 bn € a year). Politically enforced restrictions in production such as set aside and production quotas for certain products add further efficiency losses within the sector. The elimination of set aside restrictions could lead to welfare gains of about 1.2 bn €, while the allocational inefficiencies of the quota system could be highly reduced by the introduction of quota tradability. Within this overall context, labour productivity developments in the agricultural sector within the EU suggests that most Member States with a relatively low labour productivity are catching up towards the EU average while most Member States with a relatively high labour productivity tend to lag behind average productivity growth. Thus, evidence supports the ‘catch-up’ hypothesis. The main cause of increased labour productivity in agriculture is the outflow of labour, while relatively high capital input in some Member States has not always led to higher productivity growth. As the increase in farm size has been and will be a major contributor for efficiency gains, further structural adjustment is thus not only inevitable, but should be encouraged. The 2003 reform of the Common Agricultural Policy has been assessed as an important reform in the right direction with respect to allocational efficiency and regarding environmental, animal welfare and food safety requirements. From an economic point of view the introduction of decoupled direct payments will reduce distortions in production decisions and, thus improve sectoral efficiency. Several papers have supported this reform: e.g. OECD (2004), KOESTER (2003), CONFORTI ET AL. (2002) and external studies for the European Commission by the Food and Agricultural Policy Research Institute (FAPRI), the University of Bonn, the Centre for World Food Studies of the University of Amsterdam (CWFS) and the Netherlands Bureau for Economic Policy Analysis (CPB).

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8.

Structural features of economic integration in an enlarged Europe : patterns of catching-up and industrial specialisation. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2003.

Summary

This paper discusses the evolution of competitiveness, industrial and trade specialisation in the manufacturing sector of the countries of Central and Eastern Europe (CEECs). It is shown that the paths taken by the different CEECs have been quite diverse and we attempt to apply a combination of a catching-up plus trade specialisation model which is required to understand the patterns of specialisation emerging in Central and Eastern Europe.

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9.

Public pensions in the national accounts and public finance targets. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

Summary

The purpose of this paper is to provide a framework for setting the debt and deficit targets under both current and proposed definitions. Applying the same principles to record the pension liabilities over all institutional sectors, including public pensions, can be argued on the grounds of similarity or at least parallelism: (1) in public pensions too, a link often exists between the pension contributions paid (by employer or employee) and future benefits, even though this link is not perfect in typical Defined Benefit (DB) schemes, (2) accumulated pension rights have to be met in future from government revenues or assets, and therefore (3) assessing the soundness of public finances requires examination of public pension liabilities, especially as we know that population ageing is leading to their significant increase under the current rules. In accounting terms, following the principles to be used in national accounts for corporations, public pensions should be recorded as pension rights are accrued, rather than waiting until payment is made. Consistent with this, contributions paid to the public pension system giving rise to pension liability – asset from the point of view of the person covered by the scheme – should be treated as a financial transaction, and the payment of pension as a depletion of this government liability. This is in contrast with the treatment under the current SNA/ESA rules where public pension liabilities are not recorded, pension contributions are recorded as government revenue (under social contributions) and pensions as transfer payments to retirees. Preparations are underway to revise national accounting to implement actuarial recording of pension liabilities for corporations and government as an employer. This paper extends this to unfunded public pensions with the help of ‘implicit tax’ in pension contributions. The clearest advantages of the revision appear in situations where pension liabilities are shifted from the corporate sector to government, and where part of the public pension system is privatised. The proposed revision raises public debt and deficit to new orders of magnitude.

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10.

Remain in or withdraw from the labour market? : a comparative study on incentives. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2003.

Summary

This study aims at examining transitions in and out of labour market as well as transitions from one benefit to another. More specifically, it analyses incentive structures embedded in benefit and tax systems which may affect such transitions. This involves benefit levels compared to income from work, the entitlement for the duration of benefits, possible disincentives to return to work and incentives to stay on benefits. For the purpose of this study, the following four hypothetical routes for exiting the labour market have been defined.

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11.

Coordination without explicit cooperation : monetary-fiscal interactions in an era of demographic change. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2008.

Summary

Early work on the theory of economic policy stressed the importance of accounting for the interactions between fiscal and monetary policy. Tinbergen, and Cooper, taught us that there would be costs in missed targets, instability, and protracted imbalances if this was not done. Yet most models we use today treat fiscal or monetary policies as if they operated alone. This paper reviews the advantages of recognising those interactions. We consider three possibilities: fiscal leadership (in the sense of a longer term precommitment), monetary leadership, and simultaneous decision making, each underpinned by independence at the central bank. Temporal separation is important because it creates an opportunity for punishment by the follower (a result from asynchronous games). Making fiscal policy lead therefore provides fiscal precommitment, and the best results for output, inflation and fiscal balances. In particular it ensures fiscal sustainability, without the need for arbitrary and easily evaded numerical rules. We show these results are proof against override by rational governments; and robust to market reforms that flatten the Phillips curve, or globalisation and the changes in savings caused by the ageing problem.

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12.

A modern reconsideration of the theory of Optimal Currency Areas. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2008.

Summary

What can be learnt from revisiting the Optimal Currency Areas (OCA) theory 50 years from its birth, in light of recent advances in open economy macro and monetary theory? This paper presents a stylized micro-founded model of the costs of adopting a common currency, relative to an ideal benchmark in which domestic monetary authorities pursue country-specific efficient stabilization. Costs from (a) limiting monetary autonomy and (b) giving up exchange rate flexibility are examined in turn. These costs will generally be of the same magnitude as the costs of the business cycle. However, to the extent that exchange rates do not perform the stabilizing role envisioned by traditional OCA theory, a common monetary policy can be as efficient as nationally differentiated policies, even when shocks are strongly asymmetric, provided that the composition of aggregate spending tends to be symmetric at union-wide level. Convergence in consumption (and spending) patterns thus emerges as a possible novel attribute of countries participating in an efficient currency area.

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13.

Pension reforms : an illustrated basic analysis. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

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14.

Exchange rates are a matter of common concern : policies in the run-up to the euro?. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2003.

Summary

This paper discusses the reasoning behind the exchange rate policies set out in the Maastricht Treaty of the European Union. The question of the appropriate exchange rate policies for new member states of the EU should be seen from the wider perspective of Economic and Monetary Union, and the creation of a single market. Four basic arguments are made in defence of the current exchange rate framework: it is argued that exchange rate stability, per se, may be desirable if that is seen from the broader perspective of European integration, exchange rate stability is vital for countries attempting to lock permanently their exchange rate vis-à-vis the euro at a given parity, exchange rate stability prevents unilateral changes in the exchange rate that may delay partner countries’ convergence relative to the Maastricht criteria, and finally a period of “internship” inside the Exchange Rate Mechanism ensures that countries begin adjusting their behaviour/policies to the requirements of a common currency area.

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15.

Wage formation and European integration. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2003.

Summary

European integration is likely to affect labour market performance through various routes. One important channel is the effects product market integration has on labour markets. This paper reviews how product market integration may strengthen labour market interdependencies between integrating economies and therefore affect both the level of employment and the flexibility by which wages adjust to shocks.

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16.

Innovations, technological specialisation and economic growth in the EU. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

Summary

The paper analyses the effects of innovations, technological specialisation and technology diffusion on economic growth and convergence of the EU countries from 1969 to 1998. The empirical analysis is based on a panel data model, which enables us, on the one hand, to assess the impacts of these three factors as well as of the usual production factors on long-term economic growth, and, on the other hand, to calculate their partial contributions to β- and σ-convergence of labour productivities within the EU. The results show that besides capital accumulation, transferable technical knowledge is a driving force of growth for catching-up EU countries, while it is the level of Ricardian technological specialisation for advanced EU countries. Furthermore, technology diffusion is a main driving force for the convergence of labour productivities, while different levels of Ricardian technological specialisation slow down convergence.

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17.

Population ageing and public finance targets. European Commission. Directorate-General for Economic and Financial Affairs.

Publication	Brussels : European Commission, 2003.
Summary	The paper incorporates intergenerational fairness into a framework to analyse long-term sustainability of public finances under population ageing. It establishes a link between ageing-related public expenditure projections and public finance targets, thereby clarifying the connection between pension reforms and general government budget balance and debt targets.

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18.

Sui Generis EMU. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2008.

Summary

The thesis of this paper is that there is no historical precedent for Europe’s monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had “union” as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU.

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19.

External assumptions, the international environment and the track record of the Commission forecasts. European Commission. Directorate-General for Economic and Financial Affairs.

Publication	Brussels : European Commission, 2003.
Summary	While in the Commission Forecasts interest rates, exchange rates or oil prices are treated more like assumptions, it is interesting to test their realism. It appears that these variables are formulated in a reasonably accurate way and that in general alternative assumptions would not improve the picture.

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20.

Fiscal effects of accession in the new Member States. European Commission. Directorate-General for Economic and Financial Affairs.

Publication

Brussels : European Commission, 2004.

Summary

The paper looks at the evidence on the widespread hypothesis in the academic literature and by some of the new Member States’ governments that accession will bring about fiscal strains and requires higher budget deficits. It starts by calculating the expected new Member States’ payments from the EU budget and looks at the issues of additionality and national co-financing of EU funds. Other possible fiscal effects from accession are briefly discussed. Based on the results, the paper concludes that - on balance and in contrast to what the literature often maintains - accession should rather reduce the fiscal strains in the new Member States. Changes in the new Member States’ budgets will certainly be necessary and the transition year 2004 could be particularly difficult in that budgetary and administrative procedures have to be adapted in order to actually absorb the payments as projected by the Copenhagen package. However, this should not be a fundamental problem unless there are built-in inflexibilities in the budget, arising from a weak political system, different fiscal layers or a strong fiscal autonomy of sectoral ministries.

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